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PNB scam: Are public sector banks good contra bets in Indian markets?

Ajay Bodke and Sukumar Rajah / 12 Mar 18 | 07:05 AM

Pedestrians walk past a Punjab National Bank office in Mumbai (Photo: Reuters)

The Nirav Modi scandal at Punjab National Bank has shaken investors' faith in the banking sector, raising serious issues about the governance standards at public sector banks (PSBs). Many PSB stocks have taken huge hits. However, as the long-term track record of the Nifty Bank index and banking sector funds shows, investors who continue to repose faith in the sector could be richly rewarded over the long term

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Ajay Bodke

Ajay Bodke

CEO, Portfolio Management Services, Prabhudas Lilladher

Stocks from the financial sector are essential in a portfolio as they are a proxy for capturing economic growth. If an investor believes in the India story, then banking, financial services and insurance (BFSI) should be an integral part of his portfolio.

Private sector banks should get a significant allocation. PSBs should only be tactical buys. Allocation to them should be minimal. Instead of PSBs, an investor can look at insurance companies and non-banking finance companies (NBFCs) that have domain expertise.

PSBs have failed to generate wealth for investors in the long run. They have bloated cost structures, lack customer focus and are the last to embrace technology. Private banks have better growth characteristics, better return ratios, consistency in performance, and a stellar track record of rewarding shareholders.

Sukumar Rajah

Sukumar Rajah

Senior Managing Director, Director of Portfolio Management, Franklin Templeton Emerging Markets Equity

Given rising disposable incomes among the country’s rising middle class, we anticipate a growing demand for credit and investment services and as such, see potential investment opportunities within the private retail banking industry, since public-sector banks have been focusing on improving asset quality, which has restricted their ability to compete in the retail space.

As state-owned banks have found themselves weighed down by debt and the alleged PNB scandal, it has highlighted the deficiencies in how state-owned banks are managed. We believe real improvements in public-sector banks have yet to be seen, which will likely accelerate the shift in market share towards private-sector banks. We think investors are realising that strong balance sheets and adopting advances in technology could help private banking gain an even larger share of the market.

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